Is Digital Realty Going Shopping?

After reporting another quarter of solid earnings, data center developer Digital Realty Trust(DLR) is looking at acquisition opportunities, company executives said Thursday. With more than $770 million in cash at hand, the real estate investment trust has boosted its data center redevelopment budget and is evaluating acquisitions.

"There are a couple of potential deals we're looking at," said Digital Realty Trust CEO Michael Foust. "We are starting to see some income-producing opportunities. You'll probably see us doing a couple of income-producing deals this year."

Income properties generate revenue through rent from existing tenants. In recent years, Digital Realty has focused much of its acquisition efforts on buying unoccupied buildings for conversion into plug-and-play data center space that can command premium rents.

During the company's conference call with analysts, Foust and CFO Bill Stein noted that Digital Realty's recent funding moves give the company $770 million in available liquidity. Stein said that the company has added $50 million to its capital budget for redeveloping properties as Turn-Key Datacenters, boosting that line item to a range of $325 million to $375 million.

Digital Realty Trust reported solid first quarter earnings Thursday, posting higher quarterly funds from operations (FFO) of $64.5 million (70 cents a share), compared with $42.5 million (57 cents a share) in the year-ago period. Much like the other public companies in the data center sector, Digital Realty hit its numbers in a difficult economic environment, underscoring the resiliency of the data center market.

Digital Realty said it commenced leases on 450,000 square feet of space during the first quarter, while signing new leases for 85,000 square feet of space. The total footage for new leases struck some analysts as being on the low side, but Foust said it was consistent with historic leasing during the first quarter, which is traditonally a slow leasing period. Foust said the year-to-year comparison was skewed by an unusually strong first quarter of 2008.

A look back at past results confirms that assessment. Digital Realty signed new leases for 260,000 square feet of space in the first three months of 2008, but a review of first-quarter leasing in earlier years shows just 87,000 SF of new leases in 2007 and 39,000 square feet in 2006.